Saturday, February 14, 2009

New restrictions on executive pay at U.S. banks receiving federal aid may cause talented managers to flee to hedge funds and foreign-owned banks, say critics of the measure.

The limits, championed by Senate Banking Committee Chairman Christopher Dodd, were tucked into a $787 billion fiscal stimulus bill approved yesterday by Congress. President Barack Obama plans to sign the measure early next week.

The provisions go beyond the $500,000 cap announced by Obama last month, by restricting bonuses for senior executives and next 20 highest employees at companies that receive more than $500 million from the Treasury Department’s Troubled Asset Relief Program.

“The soon-to-be-law prohibits paying commissions, which are the lifeblood of a salesperson’s income,” said Scott Talbott, vice president for government affairs at the Financial Services Roundtable, a Washington trade group that lobbies on behalf of banks. “Non-TARP companies, like hedge funds and foreign firms, don’t have this restriction, so it will be easier for them to hire the top producers away.”

Dodd defended the restrictions as a proper response to reports of excesses at banks that received federal aid, including the award of a combined $121 million to four executives at Merrill Lynch & Co. just before the firm was acquired by Bank of America Corp.

“The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilize the economy,” Dodd, a Connecticut Democrat, said in a statement. “These tough new rules will help ensure that taxpayer dollars no longer effectively subsidize lavish Wall Street bonuses.”

Sliding Scale

The legislation limits bonuses and other incentive pay at those companies on a sliding scale according to how much federal aid they receive.

Restrictions would apply to senior executive officers and the next 20 highest paid employees at companies that receive more than $500 million from TARP. Companies receiving between $250 million and $500 million would face restrictions on their senior executive officers and their next 10 highest-paid workers. The limits would apply to the top five employees at companies receiving between $25 million and $250 million.

The bill would also go beyond what the White House proposed by giving shareholders in all companies, not just those receiving “exceptional” assistance, an annual nonbinding vote on executive compensation.

Past Compensation

The Dodd amendment requires the Treasury Department to review past compensation paid to the top 25 employees of TARP recipients to determine if it is “contrary to the public interest.”

The plan requires TARP beneficiaries to create a company- wide policy regarding “excessive or luxury expenditures” such as corporate jets, entertainment and “other activities or events that are not reasonable expenditures for staff development.”

It bans “any compensation plan that would encourage manipulation of the reported earnings” of TARP beneficiaries in order “to enhance the compensation of any of its employees.”

The bill “is making me nervous,” said Mindy Diamond, president of Chester, New Jersey-based Diamond Consultants LLC, which specializes in recruiting brokers. “It raises more questions than it answers. Everyone agrees that financial services need an overhaul, but no one wants to have their livelihood messed up.”

Provisions Dropped

Talbott said the limits in the stimulus plan may backfire by making U.S. banks in need of assistance less likely to seek it.

“It will make TARP less attractive and therefore reduce participation by healthy institutions, which undermines the whole program,” Talbott said.

During negotiations over the final stimulus package, lawmakers agreed to drop more punitive provisions that would have required firms taking TARP money to pay back the cash portions of bonuses topping $100,000 that were paid to employees for work last year.

Obama called bonus payouts at banks receiving federal aid “shameful” on Feb. 4 when he announced the government would require financial companies getting aid in the future to cap compensation of top officials at $500,000 a year.

While the administration’s plan would limit executive pay, it would permit additional compensation in the form of restricted stock that can’t be sold until taxpayers have been paid back with interest. Senior executive compensation plans also would have to be submitted to a non-binding shareholder resolution.

Tax Penalties in TARP

Obama’s plan superseded restrictions in the TARP legislation that relied on tax penalties to make it make excessive pay unattractive. That law was criticized for being too weak.

Also pushing to limit executives’ pay were Senators Claire McCaskill of Missouri and Sheldon Whitehouse of Rhode Island, both Democrats. McCaskill on Jan. 30 introduced legislation last month to cap executives’ pay, bonuses and stock options at $400,000 a year, which is Obama’s salary.

Whitehouse on the same day proposed a “temporary economic recovery oversight court” that would give the government the power to “take reasonable steps to restrain the massive self- indulgences” at financial companies.

House Speaker Nancy Pelosi’s spokesman, Brendan Daly, said in an e-mail today she “believes that financial institutions receiving government assistance should not turn around and pay excessive compensation, especially enormous golden parachutes, to their executives.”

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